City of Montpelier, Vermont

- The Smallest Capital City in the United States -

Mayor John Hollar City Council: Tom Golonka Thierry Guerlain Andy Hooper Sarah Jarvis Angela Timpone Alan Weiss

William Fraser, City Manager wfraser@montpelier-vt.org Beverlee Pembroke Hill Assistant City Manager bhill@montpelier-vt.org

MEMORANDUM To: From: Mayor Hollar & City Council Members William Fraser, City Manager Harold Garabedian, Project Manager Synapse Report Responses August 17, 2012

Re: Date:

Synapse Energy Economics, Inc. reviewed the assumptions and methodology of the citys various analyses and projections concerning the district heat project. They found the assumptions, methods and agreements to be reasonable. Regarding the table on page 4. The Synapse memo notes that the graph was based on the use of the less expensive #6 fuel oil. The savings should be based on #2 oil which the report states the savings are greater and accrue more quickly. This chart compares solely the cumulative savings between oil use and use of the district heat system. It does not account for other system revenues or expenses. It is interesting to note that it projects a scenario where the entire system expenses could be paid for solely through fuel savings. The report posed 11 questions/comments regarding the various agreements. Responses follow: 1. The original MOU states, The point of delivery will be at the City equipment room attached to the Heat Plant. Both Parties shall have access to read the meter(s). The City shall be responsible for maintenance and proper operation of the thermal conversion unit. There does not appear to be any further provision in the agreements about a City equipment room or for access by the City for purposes other than reading the meters. It is understood that City will have unrestricted access to this equipment room. This understanding could be codified in the agreement 2. The original MOU and Thermal Purchase and Sale Agreement (TPSA) refer to various insurance requirements on the City. It is not clear from the documents we have reviewed whether
(802)-223-9502, Telephone 39 Main Street, Montpelier, Vt 05602 www.montpelier-vt.org (802)-223-9519, Fax

to cost of such insurance or additional risks covered by existing insurance were taken into account in estimating the Citys operating costs. An estimate of added annual insurance cost is included in the base spreadsheet analyzing the project. The annual estimate is $1,380. 3. The TPSA defines Variable Cost to include, among other items, regulatory charges. It is not clear whether there will be any such charges or whether they were taken into account in estimating the Citys operating costs. The base spreadsheet on the project carries a budget labeled Professional Services. This budget item was included to cover contractual and other costs of the system: some of which would occur annually and some would occur periodically. The base budget is $9,500. The spreadsheet treats inflates this cost at 3.9% per year and scales the costs to this size of the connected load. 4. Section 3.1 of the TPSA covers purchase of Additional Capacity under certain situations. Section 3.2 covers rental of Reserve Capacity under certain other situations. The analyses we reviewed did not reflect such requirements or their costs except that document C6 contained a row for the cost of purchasing Additional Capacity as part of cash flow analysis. Tests using that row of document C6 showed this assumption to make a material difference to the Cash on Hand with Capacity Payment results. For example, if the units of Additional Capacity purchased is changed from 2 (as shown in document C6 as provided to us) to 5 units, the Cash on Hand goes somewhat negative in a few years. It is not clear whether document C6 or the Customer Service Agreement would compensate for that with additional revenue from customers or with additional fuel cost savings at City buildings. Between the time that the spreadsheet was provided to Synapse for review and the completion of their review, the spreadsheet was updated to address to this concern. 5. Section 4.3 of the TPSA provides for reconciliation of operating costs, fixed cost payments and energy payments after the fact. The City should examine how that provision squares with its Customer Service Agreement (CSA). Article 7.3.5. of the Customer Agreement identifies that a component of the Energy Charge includes costs imposed on the City by virtue of its agreements to purchase Thermal Energy from the State of Vermont . 6. Section 4.4 of the TPSA requires the City to operate the City Boilers under certain circumstances. This provision does not appear to have been reflected in the analyses we reviewed. The certain condition of Section 4.4 is at such times that the State Heat Plant is unable to the Capacity needs This would be the situation of the two State biomass boilers being down and the States backup boiler unable to operate as well. The likelihood of this situation, all three State boilers unable to operate was judged sufficiently low as to not justify analysis.

7. Section 2.1 of the CSA establishes a term of 20 years, possibly from the date service commences. If that date is less than 20 years from TPSAs Commencement Date, this may need to be adjusted to be coterminous with the TPSA.
(802)-223-9502, Telephone 39 Main Street, Montpelier, Vt 05602 www.montpelier-vt.org (802)-223-9519, Fax

The Customer Agreement will be reviewed and clarified that the obligation to deliver thermal energy is for a period of time consistent with the bond and the TPSA. 8. Section 6.6.9 of the CSA refers to Capacity Rate Discounts offered pursuant to Article I of this Agreement. Article I does not appear to mention such discounts. Article 1.17 provides the anticipated mechanism to address customer specific agreements. 9. It is not clear whether the analyses provided address the issue of thermal losses on the Citys sides of the delivery point up through the meters of customers being served. Section 7.3.4 for the CSA does appear to address the need for billing customers for such losses on a pass through basis, but not losses incurred in serving City buildings. Article 7.3.4 provides that a component of the Energy Charge will be Allowances for dissipation of heat during the transmission on the District Heating System. In the base spreadsheet a 3% loss factor is included in the assessing the amount of fuel, and the cost of fuel, required to operate the system. 10. Concerning late fees and disconnection as we discussed at our initial meeting, Sections 10.4 and 10.5 of the CSA provide for late fees and disconnection. The City should still consider an adjustment for the lead/lag of its payments to the State and payments to it from customers. Completion of a lead/lag analysis is appropriate now as the project moves forward. 5% of revenues are included in project budget for this purpose. 11. Section 14.1 of the CSA provides for downward adjustment of capacity charges to customers in certain circumstances. It is not clear whether there is a similar downward adjustment in the Citys obligations to pay capacity charges to the State. The City may wish to adjust for that possibility. The Citys agreement with the State is for a fixed initial capacity, with the opportunity to purchase additional capacity. The agreement does not anticipate that the City would want to divest itself of any this initial capacity. Capacity charges assessed to customers are based on the components identified in Article 6.6. It is anticipated that the system will grow over time, and these component will need to be reassessed to determine the appropriate Capacity Charge. Depending on the details of how the system grows, this charge could increase or decrease.

(802)-223-9502, Telephone

39 Main Street, Montpelier, Vt 05602 www.montpelier-vt.org

(802)-223-9519, Fax